Tuesday, April 20, 2010

What Happens on Wall Street...Impacts Main Street

When our current financial meltdown was in it's earliest stages I distinctly remember asking the listeners of my radio show the question “what are these companies, (that have lost a huge portion of their value) doing differently today from what they were doing yesterday?” The products and services they where providing are still the same, so why has the value of their company dropped so dramatically?

The question was based upon the simplistic theory that the value of a company was based on the demand for the products or services they provided. The reality is that often times that value was manipulated by financial institutions who created a series of complex financial instruments for the purpose of having investors place bets, not on those products and services, but the fluctuations in the values of those companies.

Author Michael Lewis takes readers inside the inner workings of how those financial institutions operate in his latest book The Big Short (W W Norton) which focuses on the sub-prime mortgage debacle that is front and center as the root cause of our current financial meltdown.

The Big Short paints a dubious portrait of the “brain” trust of Wall Street investment bankers and bond traders. Literary takes on these modern day tycoons often portray these financial titans as swashbuckling, work-hard, play-hard types, swathed in $5000 suits and expensive silk ties and packing best and brightest, Ivy League credentials.

The reality Lewis describes is loaded guys who don't qualify as the sharpest tool in the shed, who sport a track record of past failures on a grand scale, that move on to the next rung on the ladder and are rewarded with new levels of power and even larger piles of cash to plunder.

The Big Short is an at times confusing road map, think Mapquest on crack, that runs through the multiple layers of investment banks, bond houses, hedge funds and insurance companies, where billions of dollars are gambled and where all-to-often the house gets bailed out by the taxpayer.

Lewis is a master storyteller, with the ability to both entertain and outrage. As he walks you through the story of how the sub-prime house of cards was being constructed and how financial operators developed the so-called investment “derivatives” which boil down to nothing more than the investment equivalent of placing bets, you'll be left scratching your head wondering what it is that government regulators actually do? The sub-prime story combined with the the Bernie Madoff Ponzi Scheme, is a scathing indictment of the mismanagement of financial watchdogs like the Securities and Exchange Commission.

The amazing thing, even to those like me, who are casually literate in these kinds of financial doings, is that each of this dubious investment vehicles received a sign off from a government regulator. You had some of the largest investment houses packaging these doomed-to-fail loans for bond trade and then creating derivatives that boiled down to taking bets that those bonds would fail.

Like Madoff's plan and all Ponzi schemes, these Wall Street geniuses need to have enough new loans in the pipeline for re-packaging, that even after it became obvious that they were building a house of cards on a windy day, they continued to write new loans that should have been stamped “Guaranteed to Fail” rather than “Approved.”

Lewis cites the example: “In Bakersfield, California a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000.” Now some folks would have you feel pity for this poor schmuck when he inevitably lost his house. Really? At what point did we completely toss having any iota of personal responsibility out the window? Even if this guy paid every dime of his earnings each year toward an interest free loan it would take him over 50 years to crack the nut! Sorry, but I feel no sorrow for this guy.

Along the way, The Big Short, makes an interesting statement about the current state of ethics in this country. There are no real heroes here. Some of the players involved in the story discovered the brewing tempest and rather than warning about the impending storm, they looked for ways to capitalize and make billions off the mis-management and down right wrong doing. It also begs the question; if Bernie Madoff belatedly ended up behind bars for his scheme, will we ever see anyone, aside from the taxpayers, pay a price for this outright crime?